Some Investors May Be Worried About Skechers U.S.A's (NYSE:SKX) Returns On Capital

By
Simply Wall St
Published
April 21, 2022
NYSE:SKX
Source: Shutterstock

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Skechers U.S.A (NYSE:SKX), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Skechers U.S.A, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.12 = US$598m ÷ (US$6.5b - US$1.4b) (Based on the trailing twelve months to December 2021).

Thus, Skechers U.S.A has an ROCE of 12%. In absolute terms, that's a pretty standard return but compared to the Luxury industry average it falls behind.

See our latest analysis for Skechers U.S.A

roce
NYSE:SKX Return on Capital Employed April 21st 2022

Above you can see how the current ROCE for Skechers U.S.A compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

In terms of Skechers U.S.A's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 21% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On Skechers U.S.A's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Skechers U.S.A. Furthermore the stock has climbed 62% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

On a final note, we found 3 warning signs for Skechers U.S.A (2 are potentially serious) you should be aware of.

While Skechers U.S.A isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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